Posted by: John Tozzi on August 21, 2009

The conclusion is based on a study by FICO, the Here’s the key point for small business owners:

[Consumers Union attorney Gail] Hillebrand said one group that was hurt by limit cuts but has gotten little attention was small business owners who used their personal cards to fund their companies. In some cases, the cuts created cash-flow problems, she said.

Credit cards were a fallback for a lot of business owners ho couldn’t get bank lines of credit. Now card companies have spent a year reducing credit limits, often with no relation to the risk the borrower actually poses. So if you’re one of the 58 million people who has had credit reduced, has it affected your business? What have you done in response?

The full PDF of the analysis by FICO, which I’m still going through, is here. One important side note: Since your credit rating is calculated in part by the amount of available credit you utilize, when a card issuer cuts your limit it can also damage your credit score, through no action of your own. My colleague Prashant Gopal covered this back in June. Read his story here.

Update: The PDF actually doesn’t have much about the number of credit lines cut, it’s more focused on how FICO scores were affected. But FICO’s release has a good summary of the numbers.

Reader Comments

Phyllis Carmack

August 24, 2009 2:47 PM

What about all the credit card companies that are not only cutting the credit lines but also increasing the interest rates with no regard to how great your payment history? Do you think the Credit Card Act of 2009 is having an impact on all the above?

gene mccubbin

August 24, 2009 4:05 PM

Not only am I a small business owner, but my clients are as well. This shifty move by US credit card companies is a way for them to pull down their own risks and reduce their overall exposure. All in all though, it is a violation of the intent and essence of the agreement between card holder and issuer. If they are making their payments on time, and consistently, then no change should be applied to their overall credit limit. The card companies should be further punished for this low-ethics move against, particularly, small business owners who were relying on the good faith promise of credit issued by the lender.

J None

August 25, 2009 10:23 AM

I am a small business management consultant and run/ran 3 businesses of my own. I have done this for 30 years and in that time, NEVER late on a payment. The business loan we had approved was canceled Nov 2008 - bank issue, not ours. We used credit cards to get by in the "interim" - assumed we could get financing later this year. Over the last 9 months I've watched my credit line get cut in half, rates increased to 25-30% range, still no late payments, always paid more than minimum. As I paid down the cards, the line was decreased to approx. the amount owed. Many of our clients experienced the same problems so were late or couldn't pay us at all. Bottom line, between the credit line cuts, increased fees, reduced credit score through no fault of our own, we no longer have the cash flow we need to run those businesses - this is the first month I've EVER been late on a payment. This has been the ultimate snowball effect. It now looks like we will be forced to declare bankruptcy within the next 2 months. Had I been informed that all those changes could occur, I could have made decisions accordingly. Fortunately, all the debt we have is with credit card companies and any remorse I might have felt is offset by a sense of fairness.

Boca B ob

August 26, 2009 9:45 AM

J None's post is right on the money. The banks cut the lines which in turn lowered our fico scores - We did nothing and because the ratios were changed by the banks cutting our credit lines Our outstanding debt to available credit ratios worsened - through no fault of our own. This occurred because the credit lines were cut. The banks by their actions lowered our fico scores and THEN turned around and raised our interest rates because of lower fico scores WHICH they in fact created by their actions. Then these same banks were REWARDED with out tax money by The Fed and Congress so that they could take all the toxic credit card debt WHICH THEY CREATED and remove from doing any damage to their books. Im broke and the Congress in concert with the banks put me here. Small Business has been sacrificed at the feet of the Big Banks.

Laura Opstad

August 26, 2009 10:06 AM

I am a CPA in Tempe, Arizona. I have seen 2 credit cards cancelled on clients that paid in full, every month for years. I believe this is because the credit card company was not making enough profit on these accounts. My own limits have been lowered during the slower part of my year, making cash flow an issue.

I am doing what I tell my clients, continue to advertise, especially internet advertising which can be much more cost effective, review your processes and cut costs where you can and work on customer relationships.

Many small businesses will not make it through, some due to credit card companies. I believe small business built this country and is still the backbone of this country, but it gets more and more difficult to successfully operate a small business due to regulations, taxes and now limited capital. Those who make it through will have less competition, but with the current unemployment situation, these are very difficult times.

charlie bancroft

August 26, 2009 3:49 PM

On credit cards, they have arbitrarily lowered credit limits,regardless of excellent pay records. Of course, this has caused us to have greater utilization. With greater utilization,credit card issuers cite this to justify higher rates and higher payments...I guess this uncalled for action has helped the banks...but it has unreasonably put the squeeze on the rest of us. Of course CONGRESS passed a law that had some effect in 2009 and 2010, (the credit card issuers had time to get their changes in)and even the 2010 Law doesn't solve the problems that face the taxpayer - credit card users.

J and Judy

August 27, 2009 1:20 PM

We thought J None was writing for us. We,too, have been in business for 30 years and affected in the identical manner in our 30 year business.

Sharon

August 27, 2009 1:37 PM

I'm a victim of the same abuse the credit cards companies are taking advantage the there excellent customers who pay on time and never used more than 30% I'm a business owner and BOA has hurt my business tremendously I also had a line of credit for 25K and it was reduced down to 10K which hurt my debt to ratio and also my my other credit card accounts were definiterly affected, it affected my other accounts as well a downward spiral affect starting happening.

Jeni

August 27, 2009 1:58 PM

I'm so glad to hear I wasn't the only one subject to this. I was really starting to think maybe it was my fault. I've never paid late, routinely pay the balances down/off and with the past 12 months the way they are saw my balances go back up as I struggled to adjust to increased costs and stagnant growth. As a result of THEIR overextended business practices, Amex cut my credit line down to 1/4 the limit (which just shows I wasn't that much of a risk since I wasn't using it all up) and my other card did the same thing cutting credit limits down to just barely over the balance.

As a result I've gone back to my local bank and got a small business card through them and will cancel my others as soon as they're paid off. They weren't loyal to me... why should I show them any loyalty? It makes me sick to be punished by the banks because of their own actions. They sit in their ivory towers collecting multi-million dollar salaries/bonuses off of the back of my hard work and then punish me because they are over-extended.

Anthony

August 27, 2009 2:45 PM

We have two separate American Express cards used for business purposes only. One is the traditional Platinum, which we pay off every month, with no credit purchase limit.

The other is a "Delta" Platinum American Express card for business travel and such, which has a set credit limit. Occasionally we do carry a balance on it. We did not do that before the economy went sour last year. Nonetheless, the balance was small.

I was notified by American Express last week that my limit on that card had been reduced to less than half of the previous. When I questioned why, I was advised that my available credit to debt ratio was too high, which it was not before they lowered the limit. They also advised me that they had received negative information about my company from Experian. I do keep up with both out Experian and D&B credit profiles. Our D&B is 98 and our Experian is perfect. Our Experian is a 95. Both showing flawless payment histories. I have filed a complaint with Experian asking why derogatory information was sent to American Express, but have not heard anything back as of yet. I do intend to follow through with my complaint and inquiry.

I have spoken with several associates throughout the country in the past couple of months who have also experienced limit reductions for no apparent reason. Since small businesses create most of the jobs, I strongly feel that there is not enough attention being paid by by the powers that be to the realm of what is happening. Without small businesses, there will be no recovery. Without access to credit, there will be no small businesses.

Christopher Hamick

August 27, 2009 3:54 PM

Your article states that credit cards have replaced more typical lines of credits and loans for business. We have noticed, as well, that in the past year, as Advanta, American Express and others have cut their credit card lines to decent businesses, that there are still ways to get money for businesses. These include merchant cash advances from providers like Cash Federal and others in the business cash advance industry

Paula McIntyre

August 27, 2009 7:00 PM

I won't tell my story because it's the same as those who have already shared. I look forward to paying off the debt I have and writing a lengthy letter to Bank of America letting them know I would not use them again if they were the last bank on this earth. It doesn't change the situation and the struggles I'm facing now but I still look forward to that day.

John Tozzi (BusinessWeek reporter)

August 28, 2009 3:54 PM

Thanks for all the great comments. I'm interested in what this means for business owners -- what other sources of funds are you turning to if your credit line is reduced? Are you using alternative financing methods like factoring or cash advances? Are you putting off planned expansions, investments, or new hires because you don't have the capital? Business owners can drop me a line at john_tozzi@businessweek.com. Thanks.

KKIM

September 9, 2009 11:02 AM

This is the same story I hear day in and day out from small business owners. Credit Card companys are reducing credit lines or closing out the accounts totaly. So What is a Business to do? I tell my business owners to set up a credit profile for their business and get the business a credit score. By using business credit and personal it give you much better chances for your business to grow.

Toffer Grant

September 10, 2009 4:19 PM

Business and personal credit card accounts have become more difficult to access, but SBA Loans and other business loans are still accessible. Our view is that companies should focus less on using credit cards and revolving debt and try to lock down a loan if cash flow is necessary.

My company offers an employee spend management system for business by tying online controls to prepaid Visa debit cards. Businesses affected by the account cancellations and credit limitations come to us all the time. Owners prefer to keep their limited credit accounts for themselves and use our service for the day to day needs of their employees/business, namely fuel, travel and supply purchases.

Office Products

October 6, 2009 12:15 PM

This has not only hurt individuals, but small business owners alike. Many small business owners rely on credit cards for their everyday transactions to keep their business running.

mike fowler

October 24, 2009 8:40 AM

I could not agree more with everyone here. It makes me sick. I have had every credit account cut to my balance. Not only has that happened as I pay down my cards are getting cut over and over down to my balance. They all lie. I talked with BofA and they told me in March when my Limit was cut to $5000 that it was the right limit based on my income and not to worry that would be the only cut. In Sept they cut my Limit to $900 where my balance was. I called and they told me it was because my Credit score has gone down. Folks my credit score has only gone down because all my accounts have been cut to my balance which in turns shows me maxed out on my accounts. Its not fair. I am so sick of it. I cant get anything. I have paid my accounts down and get slapped for doing so. We need help. They should not be able to do this to us.

Michelle

December 5, 2009 1:47 AM

Having been a banker for over 20 years, I can tell you with 100% certainty that when credit limits get cut, and you have an unpaid balance, your scores go down. Where things start to get really bad is when you have more than 50% of your credit limit outstanding on an *individual credit card*. Then your scores start to slide significantly.

A lot of people think it is wise to load up one credit card with their debt, and keep the other ones "open". It couldn't be further from the truth. You really want to spread the debt across cards, and try to keep your %outstanding as low as possible on each card, preferably below 25%. I have had to counsel innumerable bank clients on this to help them prepare for a better deal with their lending terms.

The number of cards you have also matters as that is part of the FICO black box formula. Many women don't think twice of getting a department store card because they get 15% off on their purchase at the counter. Huge mistake. All three credit bureaus (Experian, Equifax and Trans Union) will ding you big-time if you have a bunch of cards.

I advised all of my clients to try and have just 3 major credit cards, get as high as a limit as possible, and manage with just that. It will help your FICO scoring tremendously.

I also advise people to get all 3 credit reports at myfico.com because they are the most reputable and long-standing company out there - forget the commercials with the guys in pointy boots and green tights. Go to the originator of credit reporting to get your own report.

I hope this helps someone out there!

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.